The Availability of Household Deposits in the Euro Area vs. Regulatory Approach to Funding Stability of Credit Institutions

In addition, Table 1 shows that these three categories of deposits remained correlated to a group of variables describing the economic situation of the countries (GDP pe[r]

The Availability of Household Deposits in the Euro Area

vs Regulatory Approach to Funding Stability of Credit Institutions

Keywords: household deposits, banks, credit institutions, monetary financial institutions, liquidity norms,

their stable nature, both under normal and stress conditions This is reflected in announced

low “outflow rates” of Liquidity Coverage Ratio (LCR) and projected high “stability weights”

of Net Stable Funding Stability Ratio (NSFR) The real sensitivity of these deposits during

changes with differentiated strength of their values Moreover, the recent financial crisis

the lowest volatility happened to overnight deposits, slightly larger – to saving deposits

1 The CRD IV package contains: Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 in access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC; Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements on credit institutions and investment firms and amending Regulation (EU) No 648/2012 (http://ec.europa.eu/internal_market/bank/regcapital/legislation_in_force_en.htm) The “package” implements the solutions of Basel II and Basel III

4 EBA (2013) Discussion Paper on retail deposits is higher outflows for the purposes of liquidity reporting

under the draft Capital Requirement Regulation (CRR) London: EBA / DP / 2013/02, pp 7-9 In accordance

with Article 409 (3) of the Regulation of the European Parliament and of the Council (EU) No 575/2013, this institution is responsible for technical standards of post-crisis liquidity norms

5

Ibidem

(redeemable at notice), and the most significant – to those with agreed maturity This institution also identifies the features responsible for an above-average volatility of some specific types of household deposits

This paper concerns the stability of household deposits placed with monetary financial

the current regulatory approach This topic appears as new in the literature since there has been no single liquidity ratios in the past Its purpose is to identify the determinants of the developments in deposit levels during the last financial crisis Moreover, it seeks to assess the geographical differentiation of deposits’ sensitivity to economic and financial instability of the Eurozone, thus the availability of the “resistant” ones for local MFIs The research period covers the time span prior to the crisis and the evolving destabilization, which led to the changes of supervisory arrangements

Hypotheses:

geographically diverse in terms of their average values and structure Thus, their availability for the MFIs was spatially varied;

mechanisms of the formation of total household deposits per capita However, one can identify subgroups of corresponding countries in this respect;

 In the analyzed period, the stages of the last financial crisis affected the total values of household deposits in the Eurozone member states with varying strength One cannot define a single phase when the greatest changes occurred in all countries;

were shaped by identifiable factors relating to financial market, national economies, and socio-economic characteristics of households

6

Monetary financial institutions (MFIs) are resident credit institutions as defined in European Union (EU) law, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs and, for their own account (at least in economic terms), to grant credits and/or make investments in securities See: https://www.ecb.europa.eu/stats/money/mfi/html/index.en.html.

7 This working paper presents the results, which are a part of the research project funded by the National Science Centre in Poland

The selection of the Eurozone countries8 - Austria, Belgium, Cyprus, Estonia, Finland, France, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain – is due to their diversity in a multi-dimensional space of features, ie.: economic development, condition of the financial market, sensitivity to destabilization, public finance distress, social security system and social assistance, living standards and demographic structure These national conditions seem to affect the financial decisions of households, thus the availability of stable deposits for MFIs Furthermore, this group is characterized by discipline in reporting, including transparency and uniformity of the data, which are available in the databases of the European Central Bank and the Eurostat These attributes enable to conduct comparative analysis and inference of regularities occurring in their relatively homogeneous subgroups of countries

The paper is organized as follows: the first part presents regulatory approach to the problem

of household deposits’ stability The second one describes the research methods and variables applied in the study The last part comprises of the results of empirical analysis on the diversity of household deposits and its determinants

Regulatory approach to the problem of household deposits’ stability

The package CRD IV / CRR have set the framework for the single supervisory regulations in terms of funding stability of credit institutions The process of the development of detailed

Liquidity Coverage Ratio, defining adequate liquidity of entities during 30-day period,

assuming a scenario combining idiosyncratic and market-wide stress It emphasizes the stability of household deposits by assigning them lower outflow rates than other liabilities of

credit institutions The second liquidity standard - Net Stable Funding Ratio - for which the

detailed guidance has not been announced yet, imposes the obligation on credit institutions of having adequate and stable funding structure in the long term Its important element are retail deposits which quality is made dependent, as in LCR, on the conditions of their placement

According to the decision of the European Commission on the LCR 10, the “outflow rate” for stable household deposits in the EU is established at the level of 5%, with the possibility of its

guarantee schemes that meet additionally one of the following:

unlikely i.e.: depositor has a contractual relationship with the credit institution of at least

12 months duration; depositor has a borrowing relationship with the credit institution for residential loans or other long term loans; depositor has at least one active product, other than loan, with the credit institution;

The future application of the underestimated “outflow rate”, is made dependent on the decision of the European Commission and the quality of the national deposit guarantee scheme The latter must be characterized by: the features described in Article 10 of Directive

event of a large call on its reserves; seven working day repayment period as referred to in Article 8(1) of Directive 2014/49/EU The remaining stable household deposits, including those covered by the guarantee schemes, but not satisfying the additional condition, are attributed with the outflow rate of 10% The premise of its application is abandonment of recognition of the characteristics responsible for significant variation

The scales of outflows for sensitive household deposits are defined in the rates ranging from

liabilities of credit institutions According to the EC, the conditions significantly limiting the stability of household deposits are as follows:

o the rate significantly exceeds the average rate for similar retail products,

10

See Article 24 of Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions, OJ L 11 of 17 January 2015

11 Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes, OJ L 173 of 12 June 2014

12 See Article 25 of Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions, OJ L 11 of 17 January 2015

o its return is derived from the return on a market index or set of indices,

o its return is derived from any market variable other than a floating interest rate;

calendar day period or the deposit presents a fixed notice period shorter than 30 calendar days, in accordance with contractual arrangements;

domestic currencies of the member states

In case of the characteristic indicated in point 1 or two features from points 2-5, the outflow rate for deposit is assumed to range from 10% to 15% However, if the deposit corresponds to point 1 and additionally to at least one of the features from points 2-5, or it would have at least three features from points 1-5, the stated outflow rate is from 15% to 20% The same range is adopted for deposits of non-recognition features The highest outflow rate of 100% is established for cancellable deposits with a residual maturity of less than 30 calendar days and where pay-out has been agreed to another credit institution

Comparing the above rates with those characterizing other debt sources of credit institutions,

it can be concluded that the new regulatory environment highlights the household deposits in terms of their positive impact on the safety of the banking systems Thus, an easy access to

them shall be crucial for credit institutions’ stability during future crises

Data and metodology

The analysis of the stability of household deposits in the Eurozone member states in the years 2006-2012 was carried out on aggregated variables for each country The set of data contained

market and national economies, as well as socio-economic characteristics of households

These above sets served to carry out following research:

crisis (2008), and sovereign debt crisis accompanied by economic recession (2012) It related to the entire set of countries (the country was a statistical unit) The aim of the study was to identify the common characteristics of the Eurozone member states in terms

13

http://sdw.ecb.europa.eu/browse.do?node=2116074

14 http://ec.europa.eu/eurostat

of the development of particular types of deposits per person and their classification on

internally homogeneous subsets;

 dynamic, relating to the formation of household deposits in selected countries

(representatives of specified sub-groups and individual member states considered to be interesting for the aim of this study) in the years 2006-2012 The statistical unit was the unit of time – a quarter

characterizing its: household deposits, households, economic situation and financial market Some of them were expressed per person to eliminate the impact of significant differences in population sizes

The variables describing household deposits included: total deposits, total deposits per capita, deposits redeemable at notice up to 3 months, deposits redeemable at notice up to 3 months per capita, deposits redeemable at notice over 3 months, deposits redeemable at notice over 3 months per capita, deposits with agreed maturity up to 2 years, deposits with agreed maturity

up to 2 years per capita, deposits with agreed maturity over 2 years, deposits with agreed maturity over 2 years per capita, overnight deposits, overnight deposits per capita

Numerical information on households was provided by the following variables: average size

of a household, total household consumption expenditure per capita, household consumption expenditure on durable goods per capita, household consumption expenditure on semi-durable goods per capita, household consumption expenditure on non-durable goods per capita, household consumption expenditure on services per capita, household debts from loans per capita, households at risk of poverty or social exclusion (% of population), average net income, intention of buying a car over the next 12 months, intention of buying or building a house within the next 12 months, intention of renovating a house/flat during the next 12

15 Savings rate is defined as the value of gross savings divided by gross disposable income, with the latter being adjusted for the change in the net equity of households in pension funds Gross saving is part of the gross disposable income which is not spent as final consumption expenditure For further information see: http://ec.europa.eu/eurostat/sectoraccounts site

The economic situation of individual countries was characterized by: net saving16 per capita, unemployment rate, employment rate, rate of inflation (HICP), GDP per capita, general government debt / GDP.

Domestic part of the single financial market was described by means of: MFIs’ average

, long term

government bond yields.

For the purposes of the dynamic analysis, the following dummy variables identified

collapse of Lehman Brothers Holdings Inc., until the implementation of new limit of deposits

crisis and growing economic distress)

The Ward's method was used for the identification of similarities and differences among the countries in the values and structure of household deposits per capita in selected years, while the application of regression models allowed to indicate the variables responsible for the variability of household deposits in individual member states and the disparities in their values across the Eurozone

Regression models were applied to analyze the impact of the phases of financial crisis on the overall values of household deposits in selected member states The attempt to determine differences in the development of the total household deposits under financial turmoil was

17 This index reflects changes in the market prices of the shares that it represents

18G S Maddala (2009) Introduction to Econometrics West Sussex: Wiley&Sons Ltd.; J Pociecha, B Podolec,

A Sokolowski, K Zajac (1988).Taxonomic methods in socio-economic studies Warszawa: PWN; M Wozniak (2004) General Statistics Cracow: Cracow University of Economics

 exponential:

(2) which, after logarithmic transformation gave:

where:

– dummy variables expressing belonging of the i-th quarter to the j-th sub-period (j =

1,2,3,4) P ij =1 when i-th quarter belongs to j-th sub-period, otherwise P ij =0 The basis of

The best results in statistical sense gave linear models in two variants:

where:

y i –value of analyzed type of household deposits per capita in i-th member state,

x i - value of selected explanatory variable in i-th country,

ɛ i – residual;

regression determines the input of explanatory variables):

where:

The diversity of household deposits and its determinants

– the results of empirical analyses

The last banking crisis revealed the lack of single sensitivity for analyzed types of household deposits in the group od countries Awareness of this phenomenon accompanied by new liquidity standards can contribute to the interest of credit institution in their particular categories As indicated in the introduction, the EBA has identified ON deposits as the most stable retail product type during stress period, which were followed by saving deposits (redeemable at notice) and finally - term deposits (with agreed maturity) The availability of these types remained geographically diverse in the group of surveyed countries Acting on the single financial market – free from barriers to cross-border activities - credit institutions may, therefore, define their preferences for targeted areas of deposit rising In order to assess the reliability of such a scenario, the study paid attention to the formation and structure of household deposits in the Eurozone countries during the recent financial crisis It should be noted that the information on household deposits in the ECB database was aggregated, so the opportunity to identify above-average volatile deposit categories (of high values, easy to withdrawn within a 30-day period, with unlimited access, and specific interest rates, country

of origin of depositor or currency) was limited

In the years 2006-2012, the Eurozone member states remained geographically diverse both in terms of average values and structure of total household deposits placed with MFIs, as well as transfers of funds between short-term and long-term accounts (Annex 1) The cases of the

following countries: Finland, Italy and Luxembourg (since the second half of 2009) Their significant fractions were also noted for: Ireland and Estonia The largest share of deposits with agreed maturity characterized the sectors of MIFs in: Austria, Spain (since the second half of 2007), Greece (since 2008), Luxembourg (until the first half of 2009), Portugal, Slovenia, Slovakia, Cyprus and Malta In the Netherlands and Belgium, deposits redeemable

up to 3 months proved to be a dominant category In the majority of countries (Austria, Estonia, Finland, Spain, Greece, Ireland, Luxembourg, Portugal, Slovenia, Slovakia, Cyprus and Malta), ON deposits coexisted with deposits with agreed maturity, representing together almost all household sums located in MFIs In the cases of Italy, Belgium and the Netherlands, deposits redeemable at notice proved to be complementary to ON deposits The

19 Recognized by the EBA as the most stable during stress period

greatest diversification in deposit types was observed in France and Germany, where three main categories - ON, with agreed maturity and redeemable at notice – remained complementary

On the basis of simultaneous and multidirectional changes in the sums located by households

in monetary financial institutions, there was inferred funds’ transfer between accounts, and substitutability of some deposit categories (Annex 1) During the evolving instability in 2008, this phenomenon was evident between ON deposits and deposits with agreed maturity located

in Spain, Finland, Greece, Ireland and Luxembourg In the Netherlands and Belgium this replacement was observed for deposits with agreed maturity and redeemable at notice In Germany, this fact was due to funds’ transfer from ON deposits and deposits redeemable at notice to deposits with agreed maturity

The group of 17 countries have not remained uniform in terms of the direction of changes in the total values of deposits The attention was drawn to the downward trend of analyzed variable for Greece (2010-2012), Luxembourg (2008-2010), Ireland (2010-2012), Spain (2011-2012) and Malta (2008-2009) In other countries, the development of the crisis, however, was accompanied by an increase in the aggregate value of household deposits

In the group of member states, one may indicate years of the highest growth in the total household deposits, however, in individual countries they were recognized at various stages of financial crisis Around 2008, such tendency was observed for the MFIs in: Austria, Germany, Finland, Portugal, Slovakia and Spain In Italy, this phenomenon occurred earlier, in 2007, while in Greece and Ireland later - in 2009 These differences encouraged to analyze the significance of the various phases of the financial crisis for the total levels of household deposits located in individual countries The results are presented further in this paper

According to the regulation, the ability of credit institutions to fulfill funding stability criteria

is dependent on the availability of household deposits, which remain resistant on prevailing conditions For this reason, I assessed the potential of individual populations in the Eurozone

to deposit accumulation with MFIs The explained variable in the years: 2006 (prior to the financial crisis), 2008 (banking crisis) and 2012 (sovereign debt and economic crises)

represented total deposits per capita (Figure 1) The differences demonstrated at the levels of deposits per capita showed a lack of single capacity of the populations to provide stable funding to domestic credit institutions The highest, significantly deviating from the rest of the values, characterized Luxembourg In the group of countries, such as: Austria, Belgium, Cyprus, the Netherlands and Germany, these values stood close to EUR 20 000 The lowest levels of deposits per capita were recorded for post-communist countries: Slovakia, Slovenia and Estonia

The structure of deposits per capita in selected years, showed the diversity of household preferences, in terms of the placement rules in MFIs Recalling the EBA’s statement that during the banking crisis ON deposits and deposits redeemable at notice were more stable than those with agreed maturity, it can be concluded that credit institutions in Belgium, the Netherlands, France or Italy were provided with easier access to funds less vulnerable to shocks than those in Austria, Cyprus, Spain, Greece, Malta, Portugal or Slovenia The comfort

of financing based on household deposits was thus in the Eurozone unequal and determined locally

Figure 1 The values (in EUR) and structure of total household deposits per capita in

individual Eurozone countries, in the years 2006, 2008 and 2012

Source: Own calculations based on ECB’s data

The above findings have raised the question: Can anyone indicate any similarities, in terms of

the values and structure of total deposits per capita, in such an individualized group of countries? Trying to answer, I grouped the countries according to the Ward’s method

Comparing the tree diagrams for the years: 2006, 2008 and 2012 (Figures 2-4), despite the changes in the economic situation and the financial market, there were clearly seen similarities between the following member states: Belgium and the Netherlands; Slovakia and Slovenia Furthermore, Germany and France remained in one subgroup in all analyzed years

In 2006, they formed one subset with Belgium and the Netherlands, but in 2008 they were accompanied by Italy, and in 2012 by Finland It could therefore be concluded that, on the one hand, there were visible targeted changes in household deposits per capita in some countries,

on the other hand instability of composition of the subsets proved progressive structural transformation of the Eurozone in terms of the formation of analyzed variable as well as continuing dissimilarity of Luxembourg It seemed particularly important to identify countries changing affiliation to subsets They were characterized by MFIs with instable access to household deposits This could effectively hinder entities’ refinancing in time of evolving problems on the financial market and in economies

Figure 2 Tree diagram for the EA member states, due to the level of total household deposits per capita located in MFIs in 2006

Source: Own calculations based on ECB’s data

Figure 3 Tree diagram for the EA member states, due to the level of total household deposits per capita located in MFIs in 2008

Source: Own calculations based on ECB’s data

Figure 4 Tree diagram for the EA member states, due to the level of total household deposits per capita located in MFIs in 2012

Source: Own calculations based on ECB’s data

- cases of selected countries

Due to the instability of the financial market in the years 2006-2012, I made an attempt to assess the impact of the various stages of the crisis on the levels of household deposits with MFIs For the safety of credit institutions it is important to recognize the sub-periods with the greatest modifications of the analysed variable Moreover, I raised the following question:

Was the significance of individual stages observed at national level, or was it common throughout the Eurozone? On the basis of the results obtained from the Ward’s method I

indicated the countries, which were the representatives of selected subgroups (Germany, the

and keeping distinct position (Luxembourg) A study was carried out for the above member states, using regression models (1-3) The results are presented in Annex 2

For Germany, Spain and Slovakia, the impact of evolving instability on dependent variable could be traced In the case of Germany the best fit (in statistical sense) of the model was obtained for its exponential form It explained 94% of the variation in the total value of

significant, but the principal difference in the dependent variable was recorded in the period P4 It was higher on average by 25.9%20 than the value of deposits in a period of relative stability, which was the basis of comparison Period P3 with its events had slighter impact on the level of deposits It began with the collapse of Lehmann Brothers Inc and ended with the official deadline for revising the conditions of deposit guarantees under national schemes21 The order of the impact of time variables led to the conclusion that the evolving instability in economic and financial background accounted to an important incentive for households in Germany to accumulate surplus funds in the MFIs In the case of Spain, all time variables proved to be statistically significant with an effect on the dependent variable During the sovereign debt crisis, the total value of deposits in the MFIs was higher

sub-on average by EUR 212 198.1 millisub-on from the level in the period of relative growth This model allowed to explain 95% of the variability of the analyzed phenomenon Examining the situation in Slovakia, the linear model explained 97% of the variability in total deposits and also pointed the significance of all time variables

In Luxembourg, the MFIs reported the biggest changes in total deposits during the sub-period

higher on average by over EUR 7 billion than in the time preceding destabilization The last two sub-periods affected to a similar extent the value of the variable, which was higher on

changes in analyzed value

-P4 were duplicated In the first one, the fluctuation of the total value of household deposits corresponded to the magnitude of difficulties on the financial market Phase preceding the crisis in the Eurozone and characterized by symptoms of impending imbalances proved to be statistically insignificant The equation explained 93% of the variation in total deposits In Portugal, the impact of the situation on the financial market and the economy also revealed

the equation for the Netherlands, the model explained 95% of the variability in household deposits

In Greece, since 2009 the financial and economic crises have led to the decline of the total value of household deposits in MFIs, and thus to the ongoing reduction of deposit base in domestic credit institutions Disclosure of the critical situation of general government sector, applying for international financial aid, inability to stabilize locally the financial market and restricted household access to sums located on bank accounts resulted in both: a loss of confidence in MFIs, as well as the necessity of consumption of previously accumulated savings The linear regression model allowed to explain 84% of the variability of deposits

and interventions aimed at restoring the balance, the total value of household deposits exceeded the level characterizing the period of comparison However, it was the only part of the destabilization period Through the rest, the population was less willing to cumulate their short-term and long-term funds in MFIs

The above observations did not allow to confirm a single impact of the phases of the financial crisis on the values of household deposits in analyzed countries, thus across the Eurozone Their sensitivity to the environmental changes therefore has developed individually.

4 The determinants of the deposit heterogeneity in the Eurozone

Since the sensitivity of household deposits in the Eurozone countries proved to be heterogeneous, I made an attempt to explain its causes The aim of this part of the study was

to identify economic, financial and socio-economic factors, which significantly influenced the level of analyzed variable The study was conducted for selected years: 2006, 2008 and 2012, characterizing different conditions of the financial market and national economies The variables from the groups of: household deposits, households, economic situation of the country and local financial market, expressed average values of features in analyzed countries Some of them were converted into “per capita” to eliminate the impact of different population sizes

Some of the variables were found to be statistically correlated with the values of household deposits per capita (Table 1) For the aim of this research, it was important to identify linkages between selected types of deposits per capita: with agreed maturity up to 2 years, and ON The relationship between ON deposits per capita and total deposits per capita in all years remained positive and close to one It should be noted that for the last year, the correlation coefficient for deposits with agreed maturity up to 2 years per capita and total deposits per capita was significantly lower (0.63) than for previous years In addition, Table 1 shows that these three categories of deposits remained correlated to a group of variables describing the economic situation of the countries (GDP per capita, net saving per capita), the living conditions (average net income, saving rate, average household size) and financial market (MFIs’ average interest rates for ON deposits, share price indices and MFIs’ assets per capita)

Table 1 Pearson’s correlation coefficients for household deposits per capita (by type) and selected variables, in the years 2006, 2008 and 2012

HH deposits per capita Tot

Dep

red

over 3M p.c

Dep

with agr

mat

up to

Dep

with agr

mat

over

ON p.c.